Stand with Ukraine and Donate here

According to some experts, cryptocurrencies are too dependent on the US dollar

Sep 30, 2020 | News
According to some experts, cryptocurrencies are too dependent on the US dollar

Cryptocurrencies, in their essence, have many problems. This includes negative user experience, high transaction fees (especially in the wave of the growing popularity of DeFi), and the difficulty of predicting risks, and the unpredictable impact of technical innovations. But few people assumed that overdependence on the US dollar should also be added to this list.

The appearance of stablecoins pegged to the dollar has become a convenient instrument for both ordinary users and large institutional investors. This made it possible to get rid of significant price fluctuations typical for BTC and ETH, as well as to begin the integration of digital currencies into traditional segments of the economy.

But pegging to the dollar also has a downside - the worse the world currency is in reality, the less predictable stablecoin prices are. Especially now, when the US economy is going through hard times, to put it mildly. So much so that some experts believe that the country's internal problems could lead to a significant decrease in the influence of the US currency on the world stage. And, possibly, to its departure from the position of "world currency".

Traditional exchanges have protective mechanisms to hedge such risks. And reduce losses. And there are quite a few other stable currencies into which it will be possible to transfer assets without any problems if the price of the dollar drops significantly.

Cryptocurrencies are more complicated. There are no effective “financial instruments to protect against political risks”. It is quite ironic that the means of payment, which were initially positioned independent of borders, depend on, albeit stable, but still - the national currency of one of the countries.

Here is the main issue. Taking to attention the fact that on its background stablecoins pegged to the dollar, with a trading volume exceeding $ 5 million per day, it is somehow difficult to break through to other cryptocurrencies pegged to other assets.

But there is another important factor. According to information from Mariano Conti, a former member of the MakerDAO project, it was originally planned that the token would be tied to the Special Drawing Right (SDR). This is a conventional unit of account between the member countries of the International Monetary Fund. In fact, it is a full-fledged international currency obtained as a result of combining and weighing the yen, yuan, euro, British pound sterling and, of course, the US dollar. But the study of the target audience showed that people simply do not understand SDR, because they almost reflexively evaluate everything only in well-known dollars. Therefore, DAI appeared - a stablecoin pegged to $.

Can the situation change? Of course. The MakerDAO protocol was specially designed so that you can switch to another currency if you need. But this can be a big problem. So it is better to release new ones, for example, EuroDai or YenDai, partially backed by existing DAI.

And if all goes well, they can naturally push out dollar-pegged coins. The problem is that it will first take months to develop and implement them, and then years to gain public trust. And an additional time to modify numerous decentralized applications to work with them. We may simply not have this time.

And the problem isn't just about stablecoins. Even unsecured cryptocurrencies are still indirectly depending on the US currency. For example, because most of the projects working with them keep their capital in dollars. Yes, there are already some attempts for untying the digital economy from the American currency - China, for example, is planning to issue a digital yuan. And the European Union is not lagging behind. But, to be honest, it's just the same. So the original idea of the MakerDAO project - linking a borderless cryptocurrency to international units of account, seems more logical and consistent. But in which direction the crypto world will develop is rather difficult to predict.

Published on the EXBASE based on materials from coindesk.com